Washington, DC: An International Monetary Fund (IMF) team, led by Ms. Sonali Jain-Chandra, Mission Chief for China, conducted virtual discussions on the 2022 Article IV Consultation from November 2 to 16, 2022. The mission held constructive discussions with senior officials from the government, the People’s Bank of China, private sector representatives, and academics to exchange views on economic prospects and risks, reform progress and challenges, and policy responses. The IMF’s First Deputy Managing Director, Ms. Gita Gopinath, also held virtual meetings with several senior policy officials and issued the following statement at the end of the virtual visit:
“Under the zero-COVID strategy, China weathered the initial impact of the pandemic well, allowing the economy to recover swiftly from the early-2020 lockdowns and to expand the global supply of medical goods and durable goods significantly at a critical time for the global economy. However, China’s growth has since slowed and remains under pressure amid recurring COVID outbreaks, deep challenges in the property sector, and slowing global demand.
“Although the zero-COVID strategy has become nimbler over time, the combination of more contagious COVID variants and persistent gaps in vaccinations have led to the need for more frequent lockdowns, weighing on consumption and private investment, including in housing. The regulatory tightening in the property sector, while well-intended to rein in high leverage, has added to severe financial strains for developers, leading to a rapid slowdown in housing sales and investment, along with a sharp decline in local government land sale revenues.
“Against this backdrop, growth is projected at 3.2 percent for 2022, increasing to 4.4 percent in 2023 and 2024, under the assumption that the current zero-COVID strategy will be gradually and safely lifted in the second half of 2023. Risks remain tilted to the downside, with the economy facing external headwinds from a global slowdown, a further rise in energy prices, and further tightening in global financial conditions. Domestically, recurring COVID outbreaks and lockdowns and ongoing challenges in the property sector remain key risks. Longer term, rising geopolitical tensions pose risks of fragmentation through financial decoupling pressures, and limits to trade, foreign direct investment, and knowledge exchange around technology.
“Going forward, a further recalibration of the COVID strategy should be well prepared and include boosting the pace of vaccinations and maintaining it at a high level to ensure that protection is preserved.
“In 2023, following the support provided this year, fiscal policy should protect the recovery and facilitate rebalancing. A neutral fiscal policy stance geared towards supporting households will help rebalancing towards consumption and more effectively bolster growth. Monetary policy should remain accommodative and rely more on interest-rate based measures.
“The authorities have recently stepped up their response to the property sector crisis, including by setting up a loan program to deliver unfinished houses and allowing forbearance for troubled developer loans. Building on these efforts, additional robust and well-funded mechanisms are needed for completing troubled unfinished projects and protecting new presale buyers from the risk of non-completion, while forbearance measures should be phased out. These measures will help restore homebuyer confidence and facilitate market-based restructuring. In the medium term, structural reforms, including improving the pre-sales model, rebalancing, and increasing the availability of alternative savings options, should contribute to a gradual housing market transformation to a more sustainable size.
“To ensure financial stability, prudential policies for the banking sector should be strengthened to identify vulnerabilities and rebuild capital buffers. Credit policies to businesses and households aimed at alleviating liquidity pressures from lockdowns should be market-based, time-bound, and targeted. Upgrading restructuring frameworks would help bolster financial stability while facilitating deleveraging.
“To lift medium-term growth potential, amid headwinds from demographics and fragmentation pressures, it will be key to re-accelerate market-based structural reforms, such as ensuring competitive neutrality between private and state-owned firms.
“China is taking positive steps toward addressing the climate crisis and should build on these efforts to achieve its climate goals. Rebalancing towards consumption-led growth would shift economic activity to services and reduce the energy intensity of growth. While energy crunches from climate change-induced weather shocks might require temporary increases in coal usage—provisions should be made for reducing the role of coal in energy supply. Further fostering the development of climate finance can bring an additional boost to support a transition toward a carbon-neutral economy.
“China, together with other countries, can play a leading role in multilateral efforts to address global challenges amid the increasing threat of geo-economic fragmentation and rising levels of debt distress among several low-income countries and some emerging markets. China would benefit not only from reaching new agreements in areas like e-commerce and investment facilitation, but also from strengthening the rules-based international trade system. The establishment, with China’s support, of the G20 Common Framework to support debt resolution for low-income countries was a welcome and important step. The priority now is to make this process for providing relief faster and more predictable.
“We would like to thank the authorities for the constructive discussions during this virtual Article IV mission.”